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“Technology has taken the whip-round to a new level”

Barry Sheerman MP, founder of the APPG for crowdfunding and non-banking finance, tells Rohan Banerjee that alternanative finance can be the catalyst for more entrepreneurship.

George Osborne is “not a great smiler” according to Barry Sheerman, but afforded him his best attempt across the House of Commons following the budget in March 2016. The former chancellor shot Sheerman a “strange grin” on announcing a favourable rate relief for fintech start-ups. “There’s plenty we disagree on,” admits Sheerman, who is the founder of the all-party parliamentary group for crowdfunding and non-banking finance, “but George has long recognised the potential of fintech and noted the step change that is happening.”

Osborne’s final budget raised the annual threshold for 100 per cent relief on business rates from 50 to 100 per cent, a reform which became effective in April this year. This means that around 6,000 small businesses will pay no tax and 250,000 have had their taxes cut. The Seed Enterprise Investment Scheme (SEIS), introduced by Osborne in 2011, was also increased. SEIS is designed to help early-stage companies raise equity finance by offering tax breaks to individual investors who purchase new shares in them.

Sheerman claims that the decision to raise SEIS came off the back of several conversations between the ex-chancellor, himself and two fintech-related APPGs. He says: “George knew of my interests and in particular the work I’d been doing on crowdfunding. He knew I wanted the allowance doubled for social enterprise fintech start-ups, but he actually went beyond that and matched the allowance of the private sector.”

Osborne’s successor, Philip Hammond, has been similarly keen to safeguard the United Kingdom’s booming fintech scene, particularly in light of Brexit. Sheerman is unsurprised, but insists that the fintech industry will flourish “despite Brexit, not because of it.” He explains: “The fintech surge is massive and it’s not surprising that government has tried to keep it going. It has given rise to a new culture of entrepreneurship and investment, but Brexit has made things complicated. A lot of the regulations surrounding fintech – GDPR or PSD2 for example – have been derived from the European Union. If our Brexit terms don’t match up with those, we could be a less attractive prospect for any partners in Europe or beyond. Ultimately, however, I’d expect the fintech demand to keep rising and that’ll probably subsume it. The reality of globalisation, independent of Brexit, is that people will want borderless, boundless financial services. Fintech can help deliver that.”

Sheerman, who describes himself as a “committed and passionate social entrepreneur”, thinks that crowdfunding, whether to facilitate charity, ownership or starting a business, should be considered the biggest feather in fintech’s cap. “The real key sell for crowdfunding projects,” he says, “is in their accessibility. They can help anyone and everyone to achieve an ambition whether it is large-scale or just localised. IIt could be funding a local library or repairing a church roof, or it could be laying the foundations for the next multinational company. Technology has taken the whip-round to a new level.”

Sheerman suggests that the legacy of the 2008 global financial crisis is still being felt by start-ups, but feels that fintech can play a huge part in solving that issue. “Banks don’t want to give out loans as readily as perhaps they once did. A lot of entrepreneurs are hampered by having to present a business plan alongside their ideas from the onset. It’s hard to come up with a long-term strategy when the idea might still be in its infancy. Crowdfunding doesn’t have those barriers and you can set your targets as you go along.” In turn, the veteran parliamentarian suggests that fintech might actually help to upskill the SME sector. “Fintech is about empowering individuals and communities who want to do good. It’s a good way to help them learn how to raise and manage money. It’s social enterprising and campaigning.”

In prescribing how the UK should go about nurturing its fintech scene further, Sheerman recommends “light regulation”. The UK’s principal financial regulator, the Financial Conduct Authority (FCA), was given a statutory objective of promoting competition in 2013, and government policy since has been themed by innovation and cutting red tape. Compared to the United States, which Sheerman says is “perhaps over-regulated” thanks to its size – different laws in different states complicate matters – the UK has a much more streamlined approach. The Office of the Comptroller of the Currency (OCC), an office within the US Treasury, however, published a white paper in December calling for a special purpose national bank charter for fintech companies, which means they would be subject to federal banking rules. This is effectively a license that needs to be applied for.

While the need for responsible business practices is essential, Sheerman acknowledges, it is also important that fintech companies are not blocked from the market needlessly. “The fintech APPGs have worked closely with the FCA to help it to build into its governance, a mandate to promote innovation and more importantly, competition.” Why is competition important? “Competition can only serve to benefit consumers. There has been a desire, since 2008, to break up the old monopolies and offer alternative finance. Innovation should be allowed to be disruptive and it’s good to see that the UK is willing to reflect that through policy.”

Fintech in the UK has been valued at around £7 billion by Deloitte, so it’s no great shock to see the industry feature prominently in all major political parties’ economic strategies. Is this a rare point of cross-party consensus? “I suspect the only difference in terms of an approach between a Conservative or Labour government at least, would be around protection laws. From a Labour perspective, we’d like to see people protected from even losing small amounts of money through crowdfunding or enterprising. I do think that Labour should try to embrace fintech more. As I understand it, Jeremy Corbyn is keen to get back to grassroots, and putting the power into the crowd. After all, responding to the challenges of the industrial revolution is what spawned co-operative, mutual, building societies and so much more. Crowdfunding and other forms of accessible finance give people the chance to take control.”

Rohan Banerjee is a Special Projects Writer at the New Statesman. He co-hosts the No Country For Brown Men podcast.

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Borderless banking: changing how we send and spend money abroad

Different countries represent fresh opportunities for businesses and individuals alike.

At the Bao Forum earlier this year, the People’s Bank of China governor Zhou Xiaochuan said that globalisation is a “reality for all countries and is not a matter of choice”, as he urged G20 finance ministers and central bankers to ensure their policies reflected this. Pankaj Ghemawat, professor at NYU Stern and IESE business schools, is not so sure. He argues that the world is “not nearly as globalised as people think” and told the Harvard Business Review: “I’ve been spending a fair amount of my time compiling simple metrics of globalisation. I ask people, for instance, of all the phone calls in the world, what percentage last year were accounted for by international phone calls? Turns out, the answer is about three per cent. Or I ask people questions about foreign direct investment; what percentage of all the investment going on in the world last year was accounted for by cross-border investment? The answer is less than 10 per cent.”

The challenges involved in banking and doing business across borders, of course, are not exclusive to governments or large international firms. At the most basic consumer level, people can be put off spending or sending money abroad by unfavourable exchange rates, domestic bank mark-ups or the slow processing times caused by legacy technologies.

TransferWise, a fintech venture committed to globalisation, was born out of frustration with the torpor of traditional banks, and their exploitation of customers. In 2011, Taavet Hinrikus, Skype’s first employee, and financial consultant Kristo Käärmann were Estonians living in London. Both found the hidden costs of transferring money between their native country and the United Kingdom punitive. Hinrikus worked for Skype in Estonia so was paid in euros; Käärmann worked in London but had a mortgage back home to pay in euros. As most UK banks charged a mark-up on the currencies’ exchange rate, which was not advertised, the pair were losing significant sums in a veiled commission.

In 2016, HSBC, formerly advertised as “The World’s Local Bank”, charged its customers £63.70 to change £1000 from sterling into euros. Halifax wasn’t much better, with a transfer cost of £42.50 on the same sum. For Käärmann, this amounted to “an extra tax,” on the men’s monthly salaries; but out of this problem, they found a solution. He explains: “Taavet and I came up with a simple scheme. Each month we checked that day’s mid-market rate on Reuters to find a fair exchange. I put pounds into Taavet’s UK bank account, and he topped up my euro account with euros.” As a result, Hinrikus was having his living costs paid in London and Käärmann was having his mortgage paid at home. “We both got what we needed, and neither of us paid anything in hidden bank charges.”

TransferWise now serves 61 different countries with exchanges between 41 currencies with its Borderless account, which is accessible both through an app and the company’s website. Borderless does charge a “small and transparent fee” on each currency conversion, of between 0.5 and 2 per cent depending on the locations involved. The “clever part”, Käärmann says, is that Borderless doesn’t actually need to see money leave its country of origin to be transferred. “TransferWise has accounts all over the world, linked together by our smart technology. If you want to send pounds to France, simply log on and send pounds to TransferWise’s UK account. Then TransferWise’s French account sends euros to the recipient. The money never actually leaves the country it started in.”

When TransferWise began, Brexit would have represented little more than an elaborate typo. Six years on, the UK’s decision to leave the European Union is a curveball which most businesses will have to deal with. Do fintech services such as Borderless represent an opportunity for UK-based companies to remain competitive on the continent? Käärmann says borderless accounts will “make it more convenient for people who make these transfers more often, for example a Swedish furniture maker.”

He continues: “What they would normally do when they sell in another country is make an invoice to a foreign warehouse or whoever sells their tables and chairs. They would put their Swedish account number on it. They would charge them in Swedish Krona. There is the supplier, or re-seller, getting the invoice with the Swedish account number and invoicing them in Krona. What they would do is go to a bank in the other country and do an international wire. What the Borderless account allows them to do, is to start invoicing in local currency instead.”

Philipp Paech, assistant professor of financial law at the London School of Economics, says many attempts at borderless banking will be hampered by the regulatory environment. He explains: “In practical terms, borderless banking can happen for sure, at least when it comes to transferring money for holidays or whatever. But in legal terms, it’s impossible. As long as we work on the basis of territory, then rules and regulations are going to be different in different countries.”

There is also the question of tax. How can we be sure that UK businesses won’t use fintech companies such as TransferWise to circumvent regulation by basing’ themselves in countries with more favourable tax rates? Käärmann counters: “That’s more of a question for the taxman himself. People are taxed where their business is based physically. As for abusing something, at TransferWise we have 100 people working on preventing tax evasion and anti-money laundering schemes.”

Perhaps the most significant bulwark to borderless banking, however, remains undecided. The ‘passport’ rules between banks – which allow free trade between any firms in an EU or EEA state – will be revised, and most likely removed, post-Brexit. Paech says: “After Brexit, the UK won’t have a European passport for financial services, which it does have now. At the moment, UK fintech companies can provide their services across Europe without any additional authorisation from other countries, or if they do need some then it isn’t very much. If a fintech company decides to stay in the UK and the Brexit terms aren’t great, then they’re going to need a second lot of authorisation from each EU country. That could be a lot more work.”

Lucian Morris, the UK head of fintech at Deloitte, suggests that whether banking can really be borderless depends on two things: fintech’s ability to actively encourage a step change in traditional bank behaviour and the eventual demise of cash. While bank-bashing might be in vogue, Morris points out that banks still signify the status quo. He remarks: “It’s clear that people don’t like their banking relationships, but when you look at the rate of current-account switching, it’s actually quite low. Various aspects of banks’ services might be under threat, but when you’ve already got that large-scale presence from years of being the incumbent, you’ve got time on your hands. Fintech still needs to work on getting better mass adoption.”

Achieving that, though, Morris feels is definitely possible and he credits people craving convenience as the core reason for his optimism. “We are heading towards a cashless society,” he continues, “and that’s because people want to be able to pay in real time. Contactless is already a step towards that. As we go cashless, fintech companies are going to be able to offer a market rate plus a small fee. That sort of thing, I expect, is where you’ll see the borderless movement of fintech really take off. What do we even mean by borderless? There are two tracts. One means sending or using money wherever you are in the world. The other means being able to have a local account in more than one place. You can create accounts remotely with fintech and you don’t need a physical address anymore.”

Ultimately, then, it would seem that borderless banking is possible – the technology is becoming increasingly available – but there are barriers to adoption which need to be overcome. Considering the prospect of increased protectionism post-Brexit, the business case appears clear; but it is the growing culture of convenience, as Morris notes, that may be what really turns the tide.

Rohan Banerjee is a Special Projects Writer at the New Statesman. He co-hosts the No Country For Brown Men podcast.